JP Morgan Chase 2005 Annual Report Download - page 31

JPMorgan Chase & Co. /2005 Annual Report 29
Compensation expense rose as a result of higher performance-based incentives;
additional headcount due to the insourcing of the Firm’s global technology
infrastructure (effective December 31, 2004, when JPMorgan Chase terminated
the Firm’s outsourcing agreement with IBM); the impact of several investments,
including Cazenove, Highbridge and Vastera; the accelerated vesting of certain
employee stock options; and business growth. The effect of the termination
of the IBM outsourcing agreement was to shift expenses from Technology
and communications expense to Compensation expense. The increase in
Compensation expense was offset partially by merger-related savings through-
out the Firm. For a detailed discussion of employee stock-based incentives, see
Note 7 on pages 100–102 of this Annual Report.
The increase in Occupancy expense was primarily due to the Merger, partially
offset by lower charges for excess real estate and a net release of excess
property tax accruals, compared with $103 million of charges for excess real
estate in 2004.
Technology and communications expense was down only slightly. This reduction
reflects the offset of six months of the combined Firm’s results for 2004
against the full-year 2005 impact from termination of the JPMorgan Chase
outsourcing agreement with IBM. The reduction in Technology and communi-
cations expense due to the outsourcing agreement termination is mostly
offset by increases in Compensation expense related to additional headcount
and investments in the Firm’s hardware and software infrastructure.
Professional and outside services were higher compared with the prior year
as a result of the insourcing of the Firm’s global technology infrastructure,
upgrades to the Firm’s systems and technology, and business growth.These
expenses were offset partially by expense-management initiatives.
Marketing expense was higher compared with the prior year, primarily as a
result of the Merger and the cost of advertising campaigns to launch the new
Chase brand.
The increase in Other expense reflected incremental expenses related to
investments made in 2005, as well as an increase in operating charges for
legal matters. Also contributing to the increase was a $93 million charge
taken by TSS to terminate a client contract and a $40 million charge taken
by RFS related to the dissolution of a student loan joint venture. These items
were offset partially by lower software impairment write-offs, merger-related
savings and other efficiencies.
For a discussion of Amortization of intangibles and Merger costs, refer to Note
15 and Note 8 on pages 114–116 and 103, respectively, of this Annual Report.
The 2005 nonoperating Litigation reserve charges that were recorded by the
Firm were as follows: a $1.9 billion charge related to the settlement of the
Enron class action litigation and for certain other material legal proceedings
and a $900 million charge for the settlement costs of the WorldCom class
action litigation; these were partially offset by a $208 million insurance recovery
related to certain material litigation. In comparison, 2004 included a $3.7 billion
nonoperating charge to increase litigation reserves. For a further discussion of
litigation, refer to Note 25 on page 123 of this Annual Report.
Provision for credit losses
2005 compared with 2004
The Provision for credit losses was $3.5 billion, an increase of $939 million, or
37%, from 2004, reflecting the full-year impact of the Merger. The wholesale
Provision for credit losses was a benefit of $811 million for the year compared
with a benefit of $716 million in the prior year, reflecting continued strength in
credit quality. The wholesale loan net recovery rate was 0.06% in 2005, an
improvement from a net charge-off rate of 0.18% in the prior year. The total
consumer Provision for credit losses was $4.3 billion, $1.9 billion higher than
the prior year, primarily due to the Merger, higher bankruptcy-related net
charge-offs in Card Services and a $350 million special provision for Hurricane
Katrina. 2004 included accounting policy conformity adjustments as a result of
the Merger. Excluding these items, the consumer portfolio continued to show
strength in credit quality.
The Firm had total nonperforming assets of $2.6 billion at December 31,
2005, a decline of $641 million, or 20%, from the 2004 level of $3.2 billion.
For further information about the Provision for credit losses and the Firm’s
management of credit risk, see the Credit risk management discussion on
pages 63–74 of this Annual Report.
2004 compared with 2003
The Provision for credit losses of $2.5 billion was up $1.0 billion, or 65%,
compared with 2003. The impact of the Merger and accounting policy
conformity charges of $858 million were offset partially by releases in the
allowance for credit losses related to the wholesale loan portfolio, primarily
due to improved credit quality in the IB, and the sale of the manufactured
home loan portfolio in RFS.
Noninterest expense
Year ended December 31,(a)
(in millions) 2005 2004 2003
Compensation expense $ 18,255 $ 14,506 $ 11,387
Occupancy expense 2,299 2,084 1,912
Technology and communications
expense 3,624 3,702 2,844
Professional & outside services 4,224 3,862 2,875
Marketing 1,917 1,335 710
Other expense 3,705 2,859 1,694
Amortization of intangibles 1,525 946 294
Merger costs 722 1,365 —
Litigation reserve charge 2,564 3,700 100
Total noninterest expense $ 38,835 $ 34,359 $ 21,816
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.
2005 compared with 2004
Noninterest expense was $38.8 billion, up 13% from the prior year, primarily
due to the full-year impact of the Merger. Excluding Litigation reserve charges
and Merger costs, Noninterest expense would have been $35.5 billion, up 21%.
In addition to the Merger, expenses increased as a result of higher performance-
based incentives, continued investment spending in the Firm’s businesses and
incremental marketing expenses related to launching the new Chase brand, par-
tially offset by merger-related savings and other efficiencies throughout the Firm.
Each category of Noninterest expense was affected by the Merger. The discus-
sions that follow highlight factors other than the Merger that affected the 2005
versus 2004 comparison.